They want to sell you the house…(now I earn my money)

 

This is your goal

Well, you have finally decided on a home. You have visited several homes over the past month or so. I have been by your side, watching you, listening to you and helping you narrow your search until you found “the one”.  Sure, there has been lots of frustration.  You remember the homes we visited.  We went over the listings together.  I tried to tell you that “needing tlc” probably meant more than a paint job. You discovered that people do strip homes.  You followed me over hill and dale viewing homes.  You probably think I was earning my money then.  Not really.

Time for the offer.

Now, the house is listed at $250,00.  Homes in the area that are comparable size are selling for $250,000 to $260,000.  The home seems to be priced correctly.  It has been on the market for about two months.  You mentioned that you felt pretty comfortable with the home except the carpet was old and one bedroom is painted lipstick pink.

What sort of offer would you like to make?

Well, in this market we can probably offer a lot less can’t we?  I mean were going to have to spruce it up when we move in. How about we offer $225,000 and ask the owner to give us an allowance for re-carpeting the home?

They want to sell you the house…(now I earn my money).

As I showed you, the home is priced fairly for this market.  The seller has apparently done his homework and priced the house accordingly.  I don’t think offering less is the best idea in this situation.

Oh please, we know the home is worth $250,000 but everyone knows that they aren’t going to get full price today. What about the nasty carpet and god awful pink room. They must know that they won’t get what they are asking.

I hear what you are saying.  Can we step back for a moment and look at the sale from their perspective?  When they first decided to sell, I have no doubt they thought they could get more than they are asking for the home.  They live in the house and have accepted that the most they might get is $250,000.  They probably don’t see a nasty carpet, it did not get that way overnight. They have lived with it that way gradually.  That pink bedroom is pink because they most likely think it looks good.  You don’t think for one minute that they said to each other, “let’s paint the room pepto bismal pink. No one will like that color”.  Let’s keep in mind your goal is to buy the home at the best net price.

Well, then what would you suggest?

Well, what if you offer $245,000 and ask for $7,500 in closing help.  The seller will be getting pretty close to his asking price and closing help is much easier to accept than asking for money to replace carpet and paint a room.  Your goal is to have the offer accepted.  My goal is to assist you in preparing an offer that does not insult the seller and also gives the seller some wiggle room.  We have agreed that the home is worth $250,000.  An offer of $245,000 may be acceptable. The seller may even accept the price and give the closing help.  If the owner says no to the price and yes to the closing help, your net cost is now $242,500.  Regardless, your offer allows the seller to feel good in accepting it.

Well, if we go that route, what protection’s will we have in the offer?  What if something is wrong that we did not see when we visited the home? What if our loan falls through? Are you suggesting that we just blindly make an offer and give them an earnest money check and hope for the best?

You will be protected. You see the offer will include several contingencies ( check points if you will that must be satisfied before you close the transaction). If any one of the contingencies is not met, you can void the contract and receive your earnest money back.  Your offer will include a financing contingency that clearly states you must get the loan in order to close, an appraisal contingency that protects you should the home not appraise for the sales price, a home inspection contingency that will afford you the opportunity to have the home inspected by a licensed inspector and if you do not like the results you can void the contract.  I will be with you throughout the process and I will explain your options as every contingency is dealt with.

Well, I guess you have done this a lot more times than we have. Let’s go over the paperwork and get everything signed.  How soon will we know?

The offer will be made with the stipulation that we need a reply with in 48 hours.  I will deliver the offer and stay in contact with the listing agent to make sure you receive an answer in that time frame.

Remember, they want to sell you the house…(now I earn my money)

John MacArthur

301-509-5111

If tomorrow never comes

The real estate industry is changing.  Buzz words like “traditional broker”  and “brick and mortar office”  are creeping into discussions about what used to be.  New thoughts and theories abound regarding the direction the industry will take as recovery from our 5 year nightmare begins.

What will tomorrow bring?

I can only guess.  If you step back and look at other industries, you can see that change is inevitable. The economies of scale has been accused of creating a landscape that is hostile to “mom and pop” companies from coast to coast.  I am not an economist.  I do understand that in most cases, profit is king.  The entertainment industry underwent a transition over the last 10 to 15 years.  Vinyl was replaced with 8 track which was replaced with cassettes which was replaced with compact discs which are being replaced by mp3′s.  The distribution system used to be record label to distributor to warehouses to retail warehouses to retail stores to shelves and out the door.  Today there are few distributors left and shipments are made directly to stores.  Record labels shut down regional offices and everything became a small circle with only very large players.  Those living in the DC area will remember Super Music City, Kemp Mill Records and Tower Records.  They could not order enough product to get the attractive pricing enjoyed by national chains. They lost money. They are gone.  The same sort of shake out has occurred in many industries.

Sign of the times

I had the opportunity to see life on the other of the fence.  Long and Foster appointed me “acting” manager of their Olney office in the Spring of 2009.  I got to witness first hand the frantic in-fighting that occurs behind closed doors. Traditional brokers face a changing landscape that not only includes a market that is filled with uncertainty but direct assault from other players that want to get into the business.  Firms that own more buildings than they can afford to maintain find themselves in the same dilemma as their clients.  Values have plummeted.  The value of commercial property has taken the same sort of hit that residential property has suffered.  The resources to maintain multiple offices are directly related to sales and commission splits with agents.  Brokers are faced with mounting expenses and less income.  Something has to give.  The fall out from the situation is seen across the country as “mom and pop” brokerages shut down and larger firms close offices.  Buzzwords abound that attempt to paint an optimistic slant on the changes.  Firms that do not come up with new plans will either be sold or shut down.

Banks have visions of becoming brokers dancing in their heads

Real estate agents are independent contractors.  The sign agreements to work for a broker.  Some agents become brokers and work independent of anyone else.  Most agents prefer to “hang their license” with a broker.  The industry has been that way for years.  The agent agrees to share a portion of their commission with the broker and the broker agrees to supply the agent with support, etc.  There was a time, when all agents began with a 50-50 split with the broker.  As the agent sold more, the broker agreed to increase the amount of money the agent received by reconfiguring the split.  Agents began seeking higher splits.  Successful agents would shop their talents to competing brokers and many were successful in garnering a larger share of the commission.  This system led to the fact that most traditional firms needed new blood to make a profit.  Agents were put under contract if they passed the state exam and had a pulse. Most of them failed within the first two years but the broker kept a large portion of the commission on sales that were made. (It is no secret that many agents got a license just to buy or sell their own home).

Then firms like ReMax came along with a different plan

The traditional brokerages were faced with a new dilemma.  Firms, like ReMax, came along and offered franchises to brokers that wanted to run a different business.  The agents in this system would pay a monthly fee to the broker and the agents would keep all the commission earned.  This plan was later altered to allow the agents to keep 95% of all the money they earned.  The agents could work from home.  If they wanted to have office space, they would pay rent.  The agent was responsible for all their expenses.  This seemed like a great idea to many agents.  They could control their expenses and keep almost all of their commission dollars. The brokers could budget based on the number of agents they had working for them.  It seemed like a perfect plan.

Then bundled this and bundled that unraveled

The absolute collapse of the economy came on the heels of  Wall Street  scheming.  The mortgage industry began to fold.  The government had to step in and bail out almost every major financial institution.  Housing sales began to slow down.  Requirements for a mortgage began to tighten.  Fewer people could qualify.  Prices that had skyrocketed everywhere in the country began to recede.  A few years passed and interest rates on adjustable mortgages began to reset.  Home owners began to fall behind.  Home owners that had taken equity out of homes during the good times began to see the values drop and found themselves “upside down”.  Borrowers that took out risky adjustable rate loans could not pay the new payment and discovered the home was worth less than what they owed.  The market fell apart.

The facts indicate, what has occurred is only the tip of the iceberg

Home values have plummeted about 30% in many areas.  They may continue to fall.  The “shadow” inventory of bank owned property that is not on the market continues to grow.  The basic laws regarding supply and demand will probably force home prices lower before they begin to rise.  In average times, home values could be expected to increase about 3% per year.  Simply put, if you begin on January 1, 2011, it will take about 10 years for your home to reach the value it had before the collapse.  TEN YEARS.

This is not like any real estate market that has ever existed.  There are some comparisons to the time period after the Great Depression, but this is a market members of the industry today have never experienced.  It is not a market like when interest rates hit 14%.  It is not a market like the early 90′s. This is a market that is a mystery to everyone.

Some brokers will survive.  Some agents will survive.  The costs of staying in business will have to be shared.  Agents will have to accept that if they want to keep more than about 75% of their sales generated commission, the will have to get a broker’s license and operate on their own.  Broker’s will have to accept that they will need to offer basic services to all the agents under them in return for about 20% of sales generated commissions.  Agents have forever borne the risk of succeeding.  Brokers will have to become more judicial in their decisions of whom to bring on board.  The more prestigious the broker, the better the agents, the more successful they will become. Branding competence instead of yellow signs or balloons or pictures of antiquated founders will increase credibility with a skeptical public.

This logo should mean more than the correct spelling of Realtor

The larger players are going to win. It has happened in every other industry. The challenge will be whether the new face of real estate is based on actually performing according to the Code of Ethics or will real estate go down the road of Wal-mart and other national chains that have gobbled up the retail industry.  Brokers and agents today have the opportunity to shape tomorrow.  If they sit and continue doing business as usual, they will discover that they may have been replaced by the bank teller or some version of on-line agency.

If tomorrow never comes, we can keep going down the same road.  But tomorrow always comes.

 

Do you hear what I hear?

Reaction to the economy

So, you sit there and listen to the talking heads proclaim the economy is beginning to show signs of life.  The NAR continues to trumpet that home prices are down and interest rates are at historical lows.  Oh, and the future looks bleak because interest rates will probably go up, so now is the time to buy.

Pent up demand will create an onslaught of buyers

Well, that’s what the brokers are saying.  They use logic to point out that people are still getting married, having babies, getting divorced, transferring from out of town, etc.  All the reasons people have bought in the past exist today and there must be more people on the fence because the market has been abysmal for several years.

REALLY ???

A fairy tale that rings quite true when the experts speak

It is frustrating to many of us.  I have friends that are agents in Florida, Arizona, Pennsylvania, Virginia, New Jersey and several other states.  They don’t seem to be singing the same song.  Things are not good.  Things are not getting better.  The things we see on the inside indicate, they may never get back to anything close to a normal market. You see, we actually deal with the sellers and buyers.

Sellers are devastated. It doesn’t matter if they bought the home two years ago or twenty years ago. They have lost equity. It may be real ( if the equity was cashed out ) or it may be perceived ( if they were thinking that they could sell and supplement their retirement ).  The can not sell the house for what they want to sell it for.  In many cases, they can not sell it for what they own on it.  Home prices have plummeted all over the country.  In some areas they have rebounded a bit, but in most areas it will take ten years for prices to recover.They are devastated.

Buyers are terrified. It doesn’t matter if this is their first purchase or if they are moving up or if they are just investing.  How in the world can you buy a home if you are not sure it will hold it’s value. How in the world can you buy a home if there is a chance that the bank failed to foreclose properly and you might lose the home you bought. The fact that you will be made whole has little effect on the fear of needing to find a new home again.  Oh, and how do you buy a home if your job is in jeopardy or if you lost your job.  It really doesn’t make a bit of difference where interest rates are.

0% or 5% or 10% or more doesn’t matter if you don’t have a reliable income!

The economy is rotten.  Black Friday sales are not an indicator of our true economy.  Hell, most government reports exclude the cost of living from the cost of living indexes.  Politicians appoint bureaucrats that hire people to create information.  It is always tainted.  Most of the information, as bleak as it seems, is offered in the best light.

If you happen to be at a holiday party, and find yourself chatting with a real estate agent, don’t ask…and he won’t tell.  The market is the market. It is no better than any other segment of the economy.  Sure, if you have a friend or relative that is looking and is in position to buy, refer them.  If not, talk about the weather, sports or something else.

Truth be told, those of us surviving are becoming a smaller group everyday.  Those of us that wait for that next opportunity are very aware of the large volume of bank owned property waiting to put for sale.  We are very aware of the fact that the FHA is slowly eliminating condominiums from the mix.  We know that big banks do not give a whit for the FHA criteria and would rather use the 2011 version of redlining ( something now labeled – over lay ).

If you are watching and waiting, that is ok by me.  If you would like to be kept abreast of what is happening, subscribe to the blog or send me a note and I will add you to my email list for newsletters.  If you are packing up and moving to South America or beyond….be careful, it is a world economy.

On second thought, unless you work as a Realtor, I don’t think you ever hear what I hear.  And boys and girls, that is not really a bad thing.  We all should be listening to the sound of our own drum.